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The Show Must Go On Part 1: Ownership and Business Impacts During a Disruption

07/12/2015


The photos were shocking. Water inside the Calgary Saddledome submerged the first / lowest 20 rows of seating and the entire Stampede grounds area was completely covered in flood water. We were glued to our TVs watching the drama unfold during the 2013 Southern Alberta floods, wondering how – with only two weeks to opening day – the Calgary Stampede would possibly go ahead under those conditions. And yet, recover it did – seemingly miraculously. What most of TV viewers didn’t know was that the exceptional response and quick recovery was the direct result of a carefully crafted emergency program which was put into action within minutes of the emergency. The risk of such a catastrophe had been recognized years before and MNP was engaged to work with the Stampede to establish parts of the plan which the Stampede fully implemented and continuously improved.

Private companies, and particularly owner-managed businesses, face similar challenges with respect to physical risks or disasters, but their risk can be even more widespread. Consider, for example, what would happen in your business if you or the owner had an ‘unplanned exit’, or were to become suddenly disabled and unable to make decisions or communicate for a period of time. For many businesses, this scenario would mean that cheques couldn’t be signed, staff couldn’t be paid, lines of credit would be frozen – and those are only the immediate financial impacts.

Every business needs an emergency response plan to quickly stabilize the situation following a disruptive incident and to ensure immediate response is swift and well-coordinated. For privately-owned businesses, particularly as part of succession or emergency response planning, this means planning well ahead for the ownership impacts of the emergency, but also for the continuity of the business during and after the emergency.

Ownership impacts are those matters that concern ownership and control of the company and its shares.

Consider, for example, what would happen in your business if the majority shareholder (perhaps you), was suddenly and unexpectedly absent for an unknown or permanent period of time. Who would ‘speak’ on your behalf as the majority shareholder? Would your family need to deal with decisions around what to do with the business at a time of family crisis? Who would be in charge of the business operations? And separate from that, who would handle all of the issues that would arise as a result of the emergency, such as informing employees, dealing with key clients, the banker, vendors and perhaps even the media?

Consider also, what the impact would be on banking, bonding and lease arrangements. In many privately-held enterprises, the key shareholder is also the guarantor. The absence of the guarantor may trigger a freeze on contract arrangements or even on bank accounts. All of these questions and issues need to be addressed within a formal and written Emergency Response Plan.

Good emergency response plans articulate to other shareholders and family members the principles, messages and action steps as to what should happen with the ownership of the business in the event of an ‘unplanned exit’ – either temporary or permanent – of a key shareholder. These directions need to be backed by clear information and legal documentation, including:

  • shareholder agreements
  • insurance policies (life, disability and key person)
  • personal directives
  • powers of attorney
  • current wills

In the event of a temporary exit, the documents will determine who can act on behalf of the shareholder and what authorities they would have. In the event of a permanent loss of a key shareholder, the plan and accompanying documentation should ensure the shares land where they should (usually with those who are trained and capable of running the business and / or other shareholders) and the cash lands where it should (usually with the owner’s family).

A good emergency response plan should cover all matters of ownership, including (but not limited to) those above. In addition, the plan needs to address how the business would operate after the emergency event has occurred.

Whether your business is a small, privately-held enterprise or a larger, more sophisticated corporation, your emergency response plan should contain the same fundamental planning pieces (e.g. a plan for responding to and communicating about the emergency, transfer of control or ownership, etc.), but the scope and extent of planning across business units and establishing an integrated emergency response becomes more complex with larger entities.

While ensuring your ownership requirements are in order in the event of a sudden absence or disruption, don’t forget, the continuity of operations also needs to be considered when developing plans to address any crisis or emergency situation. In part two of this blog, we’ll highlight the importance of having a plan for resuming operations and key elements you need to consider in developing that plan.

To learn more about how MNP can help you design an emergency response plan using ‘tried and tested’ tools, contact Mariesa Carbone, CPA, CA, ABCP, CRMA, Business Advisor, Enterprise Risk Services, at 780.453.5377 or [email protected], or Lynne Fisher, Senior Manager, ExitSMART at 780.401.7085 or [email protected], or your local MNP Business Advisor.